Thought of the day
04.10 - Is China's RRR cut a policy reversal?
Hong Kong-listed Chinese banks gained 4.9% in the last two trading days after China’s central bank announced a targeted 50bps cut to its required reserve ratio (RRR), effective 2018. That might suggest that the government is backing away from efforts to reduce excess leverage in the economy.
But while the cut is supportive for risk assets in China, it does not suggest a major reversal of policy direction:
- The RRR cut comes with strings attached, with banks required to boost "inclusive” lending to small and rural businesses to at least 1.5% of new loans this year. Those whose inclusive lending exceeds 10% will see the size of the cut tripled.
- The move appears justified given the recent decline in the Caixin purchasing managers' index, which focuses on private and SME firms. It’s also consistent with the government goal of lowering financial risks, since it should reduce small business reliance on shadow banking and off-balance sheet loans.
- The incremental impact on liquidity should be modest at around CNY 400–500bn. A cut to the RRR is reasonable given the declining capital outflow pressure on the yuan, and a sustained recovery in China’s FX reserves.
So we don’t view targeted RRR cuts as an about-face on deleveraging efforts. More evenly distributed lending amid a broader deleveraging push should keep the Chinese economy on track for an orderly deceleration in the second half. We prefer Chinese equities within Asia, with a sectoral preference for financials.